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D.Restructuring optionsD1.General options and pre-selectionIn China,as far as foreign investment enterprise is concerned,there exist three main restructuring categories Restructuring of investment projects in ChinaTurnaround of JVEquity structure restructuring WithdrawalOn the basis of favorable results of market and competitive analysis,option category I and II are most commonly used for companies long-term developmentCharact-eristicOption 1:Turnaround of JVOption 2:Equity structure restructuringPerformance improvement without changing the equity structurePerformance improvement with equity structure change BuyoutOption 3:WithdrawalWithdrawal from existing investment projectsSell out equityTermination BankruptcyFreezing(walk away)ExamplesBosch SiemensSiemensBayerHenkelABBDinovaBOSCH Thermo TechnikLinde forklifterWhirlpools refrigerator JV in BeijingPeugeot GuangzhouLiebherrSiemensThe general methodology is to filter options with killer criteria and hard criteria to screen out restructuring alternativesPotential optionsPre-selectionIn-depth evaluationConclusionRestructuring alternativesKiller criteriaHard criteriaSolve key problemsSecure future successGeneralCostTimeRiskIntegration(GSHA-GDAI)Sales&marketingManagementOthersProcedureImplementationAt pre-selection stage,turnaround,sell out equity and freezing can be eliminated with killer criteriaPre-selectionChinese Partner in?Killer criteriaSolve key problemsSecure future successPass?RemarksI.TurnaroundII.Equity structure restructuring -Equity buyoutIII.Withdrawal(1)Sell out equity(2)Termination(3)Bankruptcy(4)FreezingYesNoYesNoNoYesNoYesNoYesYesNoNoYesNoYesYesNoNoYesNoYesYesNoIts very hard to implement future integration and consolidation without full control the board of directorsGeberit gains full controlIts almost impossible to find a buyerIt opens the way for a new startIt opens the way for a new startFreezing will ruin Geberits relation with local government,thus causing potential hurdle for future presence and trouble to GDAITerminationTo cease operation and liquidate the JVFreezingWithdraw all foreign management team and expatriate employees and leave the JV to Chinese partner without file termination or bankruptcy.Its an illegal but widely adopted practice in ChinaBuyout To buyout the equity ownership from Chinese partner,thus turning the JV into a wholly foreign owned enterprise(WFOE)BankruptcyTo file bankruptcy and liquidate the JV.If the creditor is JVs foreign parent company,to file bankruptcy by creditor is theoretically possible but practically infeasible in ChinaBack-upDefinition of some optionsSome key problems of GSHA are closely linked to the Chinese partner.A clean break can only be assured by a separationThe VGM of Lida maintains an unofficial network consisting of former Lida-employees.He often uses this network to secure his personal interestsSince this VGM has direct access to personnel files(Fuehrungszeugnis)some employees were blackmailed if they didnt cooperate with himIn context with the Nanxiang production site the VGM should have accepted a considerable amount of kickbacks,said some former GSHAs employeesBack-upKey statement from some former GSHA employees on Mr.Cai(1)There is no cooperation between two partners from the very beginning.Mr.Cai said we make this joint venture bankrupt in 3 years.We can restart again by ourselves.It does not matter that Geberit is losing money in China.It took Geberit 10 years to make profits overseas,it needs the same time in China as well.Anyhow,it is Geberits money.Mr.Cai has extensive network in the industry but he does not use it for Geberit products.In contrast,he introduced the business for other companies that have close relationship with him.All the important decisions regarding personnel recruiting are made by Mr.Cai.Mr Schuette does not and is not able to influence these decisions.Some of these decisions are against Geberits interests,for example,some Chinese employees intend not to do the work properly and some key persons in key positions are not qualified,such as production,stock control,CCS etc.The control system in the company is totally scrapped.At the beginning of the joint venture,about RMB600K machines and 100 moulds were lost without any record.The warehouse only checks the book records rather than real goods.As a result there is difference between the book number and the real amount.This is especially serious on the incoming raw materials.They suspect that some financial accounts,especially done by Mr.Chang daohua,are false.The so-called scrapped products and the waste raw materials are sold in a not transparent way,i.e.no specific price and no invoice.The responsible person is appointed by Mr.Cai.Due to the poor control system in all areas waste is high.Auditing is extremely necessary.Back-upKey statement from some former GSHA employees on Mr.Cai(2)Geberit products technological know-how is obtained by Lida.Mr.Cai assigned one person in CCS(Ms.Ying Hua)and has obtained relevant technological information.It is possible for Lida to produce similar products if Geberit withdraws from the joint venture.More seriously,it is believed that the know-how of Duofix has been released to TOTO.The business original plant location is 100 meters further north,without any work involved for the new location.More than RMB100k has been spent on work mentioned above.And Mr.Cai insisted on contracting the electricity supply system to one local electric engineering company with a cost of RMB 1560K.The former manufacturing plant of Lida in Chang ping Road was leased to another company with annual rent of around RMB1 million which is handed to Mr.Hong/SBMC In year 1998,Mr.Cai used companys money to buy 5 Peony cards(debit cards)with value of RMB 30k each and sent to five key persons as presents,including Mr.Hong and himselfBack-upAlthough Lidas products account for 52%of GSHAs total sales volume,their actual gross profit margin is-7%.Meanwhile,Lida products sales volume sharply declined 60%from 1999 to 2000GSHA sales volume(2000)Lida products sales volume52.91%20.62%26.47%Gross profit margin-7%LidaGSHA productsImportedGross profit margin-7%Gross profit margin36%3,1621,3013,9849,74519992000Unit:RMB 000WatertankPipe&fittingBack-upActual gross profit margin:4%The reason behind Lida products sharp decline is the change in government policy on residential building construction and the shrinkage in low end sanitary ware marketGovernmentThe original policy that required all welfare residential building to have sanitary ware(low end)included at construction stage is invalid Welfare house allocation system is disappearingShrinkage of low end marketHouse decoration becomes a popular consumption trendMedium and high end sanitary ware products brand awareness improved which increase brand sensitivity substantially Consumers with growing purchasing power are turning to medium and high end sanitary ware productsBack-upD2.In-depth evaluationCost,time,risk and potential impact on future integration constitute hard criteria in determining which option to chooseOptionsHard criteriaEquity buyoutTerminationBankruptcyCostRiskTimeInte-grationD.2.1 Equity buyoutBuying out Lidas equity is favorable to future integration but the buy out price have to be agreed by Chinese partnerExplana-tionTotal CriteriaCostBuyout price:USD 149,0001)Employee dismissal fee:USD 80,000 USD 340,0002)(90%of employees will be dismissed)Audit firm:USD 20,000249,000509,000 USDRiskLida is not willing to sell out equityLida asks for too high price,and price negotiation breaks downGovernments concern on unemployment Nanxiang disagrees to sell out equity-to-TimeNegotiation period-max.2 monthsExecution time-1 month Max.3 months IntegrationGeberit has full control over its China operationFree choice of how to restructure and consolidate the operations in ChinaNo need to close Shanghais operation+1):Under the premise that the Chinese partner agree with this price2):Whether to take Lida employees service time in Shanghai Lida into account results in different amount of employee dismissal feeProviding Lida and Nanxiang agree on equity transfer,the whole transfer procedure consists of 3 major steps and last for 23 months1The investors of an FIE1)(and the third parties)agree on the equity change(or transfer)A written agreement must be signed by all parties2The FIE submits the application for equity change to the local Foreign Investment Commission(FIC)The FIC must reply within 30 days after submission3Upon approval the FIE must complete all registration procedures at the Administration for Industry and Commerce and other related Governmental bodies within 30 days1):Foreign Invested EnterpriseBack-upAn equity transfer agreement must cover the following contentsBack-upEquity transfer agreementName,address and legal representative of both the transferor and the transfereeShares and price of the transferred equityDate and way of equity transferRight and responsibilities of the transfereeConsequences in case of violationApplicable laws and conflict resolutionValidation period and termination of the agreementDate and place of the agreement singingFor Geberit,the bottom line of buyout price could be determined on the basis of financial comparison analysis Back-up Buyout Dismissal fee:USD 250,000(90%of employees dismissed)Audit fee:USD 20,000Buyout price:USD 149,000 Dismissal fee:USD 360,000 Audit firm:USD 20,000law firm:USD 20,000 Tariff return:USD 19,000Total:USD 419,000BankruptcyD.2.2 TerminationGenerally speaking,termination is unfavorable to Chinese partner,however,it can be used in some cases to achieve the foreign partners objective very quickly(personal incentive)Explana-tionTotal CriteriaCostEmployee dismissal fee:USD 100,000 USD 360,0001)Audit firm:USD 20,000Tariff return:USD 19,000Personal incentive139,000399,000 USDRiskLida is not willing to sell out equityDismissal fee disputeGovernments concern on unemployment-to-Negotiation period-max 2 monthsTermination period-within 4 months Time36 monthsIntegrationUnder current situation,providing Chinese partner agrees,termination can be the most favorable option for Geberit but its very hard to reach agreement with Chinese partner without incentive terms+1):Whether to take Lida employees service time in Shanghai Lida into account results in different amount of employee dismissal feeCompared to bankruptcy,termination generally has lower cost,shorter execution period and more simple procedure in liquidationTerminationBankruptcyInitiate partyJoint venture(Board of directors)Joint venture(Board of directors)Liquidation procedureRegular liquidationBankruptcy liquidationBoard of directorsGovernmentCourtAudit firmLaw firmLiquidation committeeOther costAudit firm costLaw firm costOther costLiquidation costTime36 months618 monthsD.2.3 BankruptcyIn view of cost,time,risk and future integration,bankruptcy should be the last choice for Geberit Explana-tionTotal CriteriaRiskCant get government approvalLidas oppositionDismissal fee dispute Negative pressLose everything including:investment loan,account receivable and staffs-Time618 months(Although the Chinas Bankruptcy Law provision that the liquidation should be completed within 6 months,many cases actually last for more than 1 year618 monthsIntegrationComplicated process to keep the business runningTo transfer equipment to Daishan or Ningbo could be very difficult-CostEmployee dismissal fee:USD 100,000 USD 360,0001)Audit firm:USD 20,000 Law firm:USD 20,000Tariff return:USD 19,000159,000419,000 USD1):Whether to take Lida employees service time in Shanghai Lida into account results in different amount of employee dismissal feeBankruptcy procedure in case of the decision made by board of director1All the members of BoD1)agree to bankrupt the company.The BoD and the supervising body of the Chinese partners in case of JV agree to dissolve the FIE2)The FIE applies to the local Foreign Investment Commission in order to formally begin the liquidation procedure1):Board of Directors2):Foreign Invested EnterpriseLiquidation procedure23456Upon approval the BoD must organize a liquidation committee within 15 days of the beginning of liquidationThe FIE must provide written notification of the name and address of the FIE and reasons for liquidation to customs,tax authority,banks with whom the FIE has an account,and etc.within 7 days from the start of the liquidation The liquidation committee must dispose of assets and the credits and debts of the FIEPriority for paying out debts:liquidation expenses;wages and social insurance premiums;state taxes;other debtsAfter completing all the liquidation work the liquidation committee must submit a final liquidation report to the BoD for approvalUpon approval the report must also be submitted to the supervising body and the local Foreign Investment CommissionThe liquidation committee goes through all the cancellation procedures with the customs,the tax bureau,the local Administration for Industry and Commerce and makes and AnnouncementBack-upThe liquidation value(market price)of GSHA would be USD 2.51 millionNon-current assetsCurrent assetsItemsDevaluated total assets after liquidated Property,plant,equipment:USD 2,142,000 Inventory:USD 1,002,000 Account Payable:USD 524,000 Total cash and security:USD 208,000Total assets Total assets(Book value):USD 3,951,000 Liquidation value(Market price):USD 2,510,000 Devaluted property,plant,equipment:USD 2,142,000 x 0.6=USD 1,285,000USD 1,002,000 x 0.6=USD 601,000524,000 x 0.8=USD 419,000208,000 X I=USD 208,000Back-upD.2.4 Comparison of the alternativesEquity buyout is clearly the best choice for Geberit.Termination can be very attractive if both parties can achieve mutual understanding CostRiskEquity buyoutTimeIntegrationTerminationBankruptcyMax.3 months-to-+USD 249,000 USD 509,0001)36 months-to -+USD 139,000 USD 399,000+Personal incentive618 months-USD 159,000 USD 419,0001):Under the promise that the Chinese partner agree and the figure already include redundancy restructuring costBuy out is not only the most beneficial option to Geberit,but also to the rest of parties as well1):Personal incentives 2):Re-investmentBuy outTerminationBankruptcyMr.CaiMr.Hong/SBMCNanxiang GovernmentMunicipal GovernmentGSHA employeesGeberito to+o to+to+to+-/+-/+-+-o+:best-:worst1)1)2)2)1)1)D3.Feasible scenariosGeberit should start the negotiation quickly.If no agreement can be reached,bankruptcy could be the last outcome with the consequence of losing everything(investment,loans,machines,staff etc.)Negotiation2 monthsStartImplementation1 monthScenario I:BuyoutImplementation3 monthsScenario II:TerminationExecution618 monthsFall-back:BankruptcyAgreementAgreementNo agreementMin.time3 monthsMin.time5 monthsMin.time820 monthsEach scenario will result in different organizational restructure Dismissal fee(90%employee)Buy out Lida Closing cost(Ningbo)Location Machine Potential higher margin Synergy Price too high No agreement with Lida Uprising of employees,sabotage Finding management teamScenario I:Buy outScenario II:TerminationFall-back:BankruptcyBuy out of SBMC Headquarters Sales&Marketing CCS Production Closed Production Dismissal fee(all employees)Write-off investment Lower operating cost Logistic Management team Lay-off easier Longer than buy out Loss of all loans and account receivable Negative press Sharp drop in business Dismissal fee(all employees)Write-off investment Transfer cost Management team Logistic Lower operation expenses Potential higher margin Much longer than buy out Loss of all loans and account receivable Negative press Drop in businessTermination of GSHA Rep office of GDAI Sales&Marketing CCS Headquarters and import ProductionBankruptcy of GSHA Rep office of GDAI Sales&Marketing CCS Headquarters and import ProductionShanghaiNingboDaquCostBenefitRiskHowever the organizational structure for scenario I should be aimed for as 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